A Cynical Look at Microsoft
Updated: Jul 3, 2020
Microsoft has been in the news in the last couple of days, and its not a great thing to read about if you are an investor in Microsoft. For those, who are not aware, yesterday a federal judge approved a motion for the US Department of Defense to suspend work on a significant Microsoft contract. The contract is the Joint Enterprise Defense Infrastructure (JEDI for short) contract. This contract is reportedly to be valued at $10 billion USD and it is basically the first major cloud services implementation in the US government’s defense sector. Based on this, it is evident this contract is a big deal for Microsoft. Back in October 2019, when Microsoft announced that they had won the bid for the JEDI contract, the MSFT stock had gone up by more than 5%. The implication of landing such a big contract with the US government is huge as it builds a foundation for cloud infrastructure within the US Department of Defense.
So why did is the current contract suspended? Well, Amazon, who were in the running for the contract, filed a motion to suspend the work as they accuse the Pentagon of “clear deficiencies, errors and unmistakable bias”. So now this will no doubt lead to a lengthy battle in court where the Pentagon will have to justify why the contract was awarded for Microsoft.
Of course, there are other issues at hand (such as Trump’s fued with Jeff Bezos) which could swing the ultimate decision in either way of Microsoft’s favour, but we will not get into that.
So, what does this mean for Microsoft and holders of MSFT stocks? For starters, yesterday as market opened, Microsoft saw $17 billion of its value vanish in minutes . As someone, who has a small position in Microsoft, I see this news with positivity. Firstly, this has given me an opportunity to go in and buy more of MSFT. This is because I believe that this news will not have a lasting effect on Microsoft. Such cases where a supplier claims unfair treatment is more common than one might think, and I fully expect Microsoft to be able to carry on and deliver this and many more future contracts to the Pentagon. Which is why, I see this situation as an opportunity.
Let’s consider for a moment what might happen if the judge rules against Microsoft. Well, in most cases, the Department of Defense must run their process again and Microsoft and Amazon Web Services will be the front runners once again. (There are no cloud products available in the market that come even close to AWS and Azure, and no Google Cloud Platform is not there yet). Thus, after this huge incident, I highly doubt, AWS will be awarded the final contract as the relationships have already soured. The more likely scenario is that the Pentagon will be more thorough in their reasoning this time. So either ways, I see Microsoft performing this contract eventually.
There is a reason why Amazon has reacted in this way. In the last 4 years AWS had a 40% share of the cloud services market while Microsoft, Google and others were hovering around the 5% - 10% range. Microsoft after revamping its Azure platform has narrowed that gap significantly as can be seen in the 2019 market share. Azure is a giving AWS a tough competition in terms of both product offerings and market share. This lawsuit is an attempt by Amazon to slowdown Microsoft’s growth. But I think that inevitably, Microsoft will be able to capture at least 20% - 25 % of the market even if they do not end up being the number 1 cloud services provider.
Therefore, I remain quite optimistic on Microsoft and this news has given me a window to go in and increase my position on Microsoft.
Disclaimer: This post should not be interpreted as investment advice as I am not a professional financial consultant. The objective of this blog is to share my experiences with others and receive feedback. I will provide links to my information sources to the best of my abilities, but the reader is responsible for their own due diligence
Credits: Business Insider, Statista